After a yearlong inquiry, the Federal Trade Commission warned brands not to gag their small business operators or charge them extra fees.
In the ongoing conflict between franchisers and franchisees, the federal government has taken a stand in favor of the smaller operators.
In a relationship fundamental to American commerce, franchisers—brands like McDonald’s and Jiffy Lube—license their concepts to individual entrepreneurs who provide start-up capital and may own one or many locations.
On Friday, the Federal Trade Commission (FTC) issued a policy statement and staff guidance cautioning franchisers against restricting their franchisees’ ability to speak to government officials or imposing undisclosed fees. The commission’s action stems from growing concerns about unfair and deceptive practices by franchisers, aiming to ensure the franchise business model remains a pathway to business ownership for honest small business owners.
The FTC has been scrutinizing the franchise industry, which includes 800,000 business establishments, since early last year. The inquiry included a request for information about the franchisee-franchiser relationship. The Government Accountability Office also issued a report around the same time, highlighting franchisees’ lack of control over crucial business decisions and their lack of understanding of all the risks before purchasing a license.
Among the 2,200 comments posted in response to the FTC request, a majority of franchisees called for changes to industry rules, while most franchisers did not.
The FTC identified 12 major complaints from franchisees, including dissatisfaction with unilateral changes to operational manuals, noncompete clauses, and misrepresentations in franchise sales documents about time requirements and investment returns.
The agency did not address all these issues and stopped short of updating the Franchise Rule, which has remained largely unchanged since 2007. Proposing new rules at the end of a presidential term is risky, as they can be overturned if the White House changes parties.
However, the FTC responded to concerns about broad nondisparagement clauses that could prevent franchisees from filing complaints with regulators or participating in government investigations. Franchisees must be free to do so without fear of retaliation, the agency stated.
The FTC’s two conservative members, Andrew Ferguson and Melissa Holyoak, voted against the policy statement, arguing it overstated the law and could burden businesses.
Aligned with the Biden administration’s effort to curb junk fees, the FTC clarified that franchisers could not demand new payments, such as technology or marketing surcharges, if not detailed in the initial franchise documents.
The agency reopened its request for information and noted that its review of the Franchise Rule was ongoing.
John Motta, a Dunkin’ Donuts franchisee and chairman of the Coalition of Franchisee Associations, said undisclosed fees had been a major issue for his group’s members. “Overall, I think the ruling will be good for franchisees,” he said. “For the franchisers that are good and transparent and work with franchisees, there should be no effect on them.”
Matthew Haller, president and CEO of the International Franchise Association, called the policy statement a solution in search of a problem. “There is no evidence that franchisers are silencing franchisees’ voices in speaking to regulators,” he stated. “Franchisees continue to vote with their pocketbooks by adding more locations within existing brands.”
Leading up to the FTC’s announcement, the International Franchise Association released principles for “responsible franchising,” recommending clearer presale disclosure documents. This framework did not go as far as the Coalition of Franchisee Associations’ “franchisee bill of rights,” which included the freedom to buy from any vendor meeting the brand’s standards.
The FTC’s announcements did not include new enforcement actions. In 2022, the agency brought the first case in 16 years under the Franchise Rule, accusing a burger chain of making false promises to franchise purchasers. The chain was ordered to pay $56 million in monetary awards and penalties this year.
The FTC is also monitoring the mergers of large franchise brands. In March, it commended the termination of Choice Hotels’ attempt to take over Wyndham Hotels & Resorts, following franchisee protests over concerns that a megabrand in the midscale and budget segment could reduce hotel operators’ bargaining power.
Source: nytimes
